The Tax Attic with Jerry Coon — January 14, 2010

My intent this week was to continue writing on what a taxpayer should do if he or she receives an incorrect W-2 or 1099. However, the Internal Revenue Service has interrupted my plans.

Since the first day I entered the tax business in 1978, the IRS has, off and on, announced plans to formulate a plan to regulate all tax preparers. In the past year or two, under the direction of current IRS Commissioner Douglas Shulman, these plans have finally moved to the implementation stage. Since approximately 80 percent of taxpayers employ either a tax preparer or use commercial software to prepare their return, this is a very good thing for all taxpayers.

Shulman said, “Our proposals will help ensure taxpayers receive competent, ethical service from qualified professionals and strengthen the integrity of the nation’s tax system.”

These regulations will raise the competency of all tax preparers and will allow the IRS to better regulate all tax preparers. This means that, in theory at least, taxpayers will receive a better product when they pay a tax preparer to prepare their return.

Three classes of tax preparers have always been regulated. Enrolled agents (EAs), certified public accountants (CPAs), and attorneys have been required to take competency exams, to take yearly Continuing Professional Education (CPE), to register with the IRS, and to abide by a professional code of conduct as laid out in IRS Publication, Circular 230. Oddly enough, other non-regulated preparers were not subject to any of these requirements.

All of that changed on January 4, 2010, when the IRS issued News Release IR-2010-1, Fact Sheet FS-2010-1, Fact Sheet FS-2010-2, and the 57-page Return Preparer Final Report. Now, anyone who signs a tax return as a paid preparer will be subject to a full set of regulations similar to EAs, CPAs and attorneys.

First, they will be required to register with the IRS and obtain a Preparer Taxpayer Identification Number (PTIN). As part of this registration process, the IRS does perform a background check and can refuse to issue a PTIN. The IRS is allowed to charge a “reasonable, non-refundable fee” for issuing a PTIN. The registration must be renewed every three years. The IRS retains the privilege and is considering expanding this registration process to non-signing preparers in the future.

Non-signing preparers are those people who are employees of tax preparation firms who don’t actually sign tax returns but do the majority of the input on the tax returns. Most tax preparation firms have interns or employees who input W-2s, 1099s, and other basic information but don’t finalize the return. That finalizing process is left to the senior tax preparers. The senior preparers will be subject to regulation, but as of right now the interns will not be regulated.

Second, anyone who signs returns as a paid preparer will be required to take a competency test. Initially, there will be two tests. The first test will measure wage and non-business income Form 1040 tax returns. The second test will measure wage and small-business income Form 1040 returns. Eventually, it appears that there will be a third test measuring competency on business returns such as corporate 1120 and 1120S returns, partnerships, estates, and trust returns.

It is clear there will no grandfathering. No matter how long a person has been preparing returns, how many returns that person prepares, or how simple or complicated the returns are, the preparer will have to take the competency tests. It is not clear what would happen if a preparer signs a return outside of his demonstrated competency level, but I think we can all say “penalty.” We just don’t know how large that penalty will be. Of course, there will be a “reasonable, non-refundable fee” for administering these tests.

Third, all paid preparers will be required to take 15 hours of annual Continuing Professional Education. The 15 hours must include a minimum of three hours of federal tax law updates, two hours of ethics, and 10 hours of general federal tax law topics. I will say that the preparers working for me and the preparers I am familiar with all take at least 15 hours of CPE now. EAs like me have always been required to take a minimum of 24 hours of CPE, so I don’t feel that 15 hours is out of line.

Finally, anyone signing a tax return will become subject to the professional code of conduct as laid out in Circular 230.

Even though these regulatory directives were issued last week, they won’t be fully implemented until 2011. We do expect to see updates throughout the tax season. If the IRS is nothing else, it’s good at issuing updates. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns
Action Tax Service on Northland Drive in Rockford.
Contact Jerry through his website at
www.actiontaxservice.com.

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